Analysts cut their estimates for the profits of Sapphire Foods, which operates Pizza Hut and Kentucky Fried Chicken restaurants in India, after disappointing second-quarter results.
Sapphire reported a 43% fall in its net profit for the three months ended September, hit hard by consumers’ moving away from pizzas to cheaper items such as chicken. Revenue, meanwhile, rose by 14.2%.
Although the company is present in both segments — through Pizza Hut and KFC — the lack of love from consumers towards pizza hit the company hard as it gets about 21% of its revenue from Pizza Hut.
The quarter saw Pizza Hut’s same-store sales fall by an eye-watering 20% compared to last year, even as KFC saw flat revenue.
Analysts pointed out that Pizza Hut has seen a significant decline in demand and sales compared to its peers. As the macroeconomic conditions are not showing much improvement, they said, the trend is expected to continue at least for a few more months.
Interestingly, even as the analysts slashed their estimates, they retained their ‘Buy’ rating on the stock on expectations of a turnaround when demand conditions stabilize.
One of the brokers who revisited their expectations for the company’s future earnings was Antique Broking. It slashed Sapphire’s EBITDA estimates by 5% for FY24 and 9% for FY25.
However, it maintained that the slowdown was“transitory in nature” and KFC should be able to recover the growth momentum.
“We expect Sapphire’s performance to improve with revenue [growth] hitting 20% and an EBITDA compound annual growth rate of 22% over FY23–26E driven by menu innovation, aggressive store expansion in KFC, and focus on omnichannel-driven profitability..,” Antique Stock Broking analysts said.
One of the most aggressive revisions for the company’s profit estimates came from Centrum Broking Ltd, which slashed its profit estimates for the company by 19.0% for FY24 and 12.5% for FY25.
“On costs front, we believe short term pain are not over yet as raw materials such as cheese still remain at elevated levels compared to last year though margin would improve gradually from Q3 onwards in our view,” said the broker.
IIFL securities have cut down the adjusted EBITDA estimates by 5-9% for the next three years, noting that “while management has laid out certain initiatives to better Pizza Hut performance.. it would be more fruitful in the longer term..”
“We downgrade our..estimates..factoring the weakness in Pizza Hut performance in 2Q, while broadly maintaining estimates for KFC and upgrading Sri Lanka business numbers on the back of easing the macroeconomic situation in Sri Lanka leading to better growth,” they said.
On the other hand, Nuvama Institutional Equities have maintained that their profit estimates will remain more or less unchanged as “KFC is a much larger value driver and the investment case is intact..” even when Pizza Hut's performance is “disappointing”. KFC contributes nearly two-thirds of the company’s revenue.
Nuvama trimmed its estimates by only 3.3% for FY24 and 1.9% for FY25. “Sapphire remains a top QSR pick,” they said.
Unlike the above brokers, Motilal Oswal chose to retain its operating profit estimates for the company, claiming that higher sales in KFC will offset weakness in Pizza Hut.
“We have broadly retained our EBITDA estimates for FY24/25 at 18.6%. EBITDA is likely to register a compound annual growth rate of 26% over FY23-25, with an expectation of recovery in KFC and PH formats in 2HFY24,” it said.
|Target Price (INR)
|Nuvama Institutional Equities
|Motilal Oswal Financial Services
|Antique Stock Broking